Exam 10: Fundamentals of Cost Management

The unused resource capacity is the difference between the resources supplied and the resources:

Mobile Repair Company is preparing its annual profit plan.As part of its analysis of the cost of its purchasing activity,management estimates that the $125,000 for purchasing support should be assigned to the individual vendors from the information given as follows: Venolor Venoor Vendor A B C Units purchased 100,000 200,000 200,000 Purchase orders (annual) 6 24 100 Number of shipments received 12 52 25 Required: a.Prepare a schedule to allocate the purchasing costs to the three vendors,assuming Mobile Repair uses units purchased to compute activity-based costs.b.Prepare a schedule to allocate the purchasing costs to the three vendors,assuming Mobile Repair uses purchases orders to compute activity-based costs.c.Prepare a schedule to allocate the purchasing costs to the three vendors,assuming Mobile Repair uses number of shipments to compute activity-based costs.

Crafter Lumber Supply noticed a recent decline in the amount of purchases from a key customer.Worried that other customers might also reduce their purchases,Crafter's management decided to evaluate the cost of its delivery service.Which of the following cost drivers is more appropriate for general administrative costs of the Delivery Department?

The amount of resources used in an activity-based costing (ABC)system for a specific activity is computed by multiplying the:

Miracle Mile Corporation manufactures electric scooters.Information regarding resources for the month follows: Resources Used Resources Suppled Administrative \ 100,000 \ 140,000 Customer service 20,000 40,000 Depreciation 120,000 200,000 Energy 100,000 100,000 Engineering 50,000 52,000 Long-term labor 50,000 70,000 Marketing 140,000 150,000 Materials 300,000 300,000 Parts management 60,000 70,000 Quality inspections 90,000 100,000 Setups 140,000 200,000 Temporary labor 40,000 48,000 Required: a.Prepare an analysis of the unused resource capacity for the month.

Thompson Metal Corporation (TMC)supplies various types of machine tools to manufacturing companies.TMC has always paid a lot of attention to the quality of its products.Recently,an outside supplier has approached TMC to supply an important and intricate component of one of its more advanced tools that TMC has been manufacturing in-house.Sam Weiss,a junior accountant at TMC,has collected the following information regarding this proposal.The cost of manufacturing one unit of this component internally are as follows: Direct materials: \ 29.60 Direct labor: 13.00 Variable overhead: 19.50 (@150\% of direct labor cost) Fixed overhead: 26.00 (@200\% of direct labor cost) Total cost: \ 88.10 The outside supplier has quoted a price of $90 per unit for supplying this component.The following is a conversation that took place among the manufacturing manager (Dana Rice),buyer (Emily Scanlon),and Sam Weiss.Weiss: I think that we should continue to manufacture internally because we can save $1.90 per unit on this component.Rice: According to your report,we would save $1.90 per unit,but I do not agree with those numbers.Weiss: What do you mean? I have followed the same costing guidelines this company has used for years.I have even cross-checked my numbers with historical data and know for sure that the overhead rates which I have used are correct.Rice: I am sure you have done your job thoroughly,but I think that our costing system is archaic.This component is complex and difficult to manufacture.I believe that our overhead allocation method does not accurately capture the production difficulties and the additional resources that are devoted to the manufacture of this component.For example,a significant portion of our quality problems are due to this component.We spend close to a third of our quality inspection time on just this component alone,but that is not reflected.These quality problems cause delays in getting this component to the assembly department,and that causes a delay in getting the final product to the customers.Many of our customers are expecting just-in-time deliveries,and they get upset when we're late.Scanlon: I know that the supplier that has approached us has a strong reputation for quality.Therefore,we can rest assured that we will have negligible quality problems.Rice: Sam,your report does not consider this additional benefit from buying outside.I would appreciate if you can rework your numbers to better reflect the true costs associated with manufacturing this component internally.Required: (a)Assume the role of Sam Weiss.What are the different elements of costs that are likely to be associated with the manufacture of the component? Does the current costing system capture these costs? (b)Recommend improvements in the costing system.(c)How can Weiss quantify "qualitative" benefits such as quality and on-time delivery?

Marine Enterprises has developed the following unit costs for the production of one of its products,based on a normal activity of 10,000 units per month: Direct materials 2.0 pounds @\ 12=\ 24.00 Direct labor 1.5 hours @\ 15=\ 22.50 Variable overhead 120\% of direct labor cost Fixed owerhead 140\% of direct labor cost What is the total amount of direct labor budgeted for a month in which production is expected to be 11,000 units?

The cost driver rate is computed by dividing the total cost per activity by the estimated number of units produced.

Forensic Specialists developed the following information for its first quarter cost of quality report: Sales \ 5,600,000 Cost of goods sold \ 3,360,000 Disposing of scrap \ 235,200 Quality training \ 84,000 Inspecting materials on delivery \ 280,000 Performance reviews \ 70,000 Resolving customer complaints \ 31,920 Certifying suppliers \ 140,000 The relevant percentage to be used to express internal failure activities at Forensic Specialists is:

A cost of quality system is based on the trade-off between incurring costs to meet product (or service)specifications and the costs of failing to meet those specifications.

Unused resource capacity plus the amount of the resources used is equal to the amount of resources supplied.

Tangible customer expectations include how the product's salespeople treat customers and the time required to deliver the product to the customer.

Express Travel decides to price delivery service according to the results of a recent activity-based costing (ABC)study.The study indicates Express Travel should charge $16 per order,1% of the order's value for general delivery costs,$2.50 per item,and $45 for delivery.A year later,Express Travel collected the following information for three of its customers: Cost driver Customer Customer Customer A B C Number of orders 18 8 12 Number of deliveries 10 10 24 Number of items 2,000 4,000 12,000 Ordervalue \ 120,000 \ 80,000 \ 100,000 What are the total delivery costs charged to Customer A during the year?

Which of the following items would be classified as a volume-level cost in an activity-based cost management (ABM)system?

Activity-based costing (ABC)can be used to provide information for managerial decision-making in service,merchandising,and manufacturing companies.

Which of the following is a prevention activity in controlling quality?

Windom Corporation manufactures small airplane propellers.Sales for April totaled $850,000.Information regarding resources for the month follows: Fesources Resources Used Suppled Parts management \ 30,000 \ 35,000 Energy 50,000 50,000 Quality inspections 45,000 50,000 Long-term labor 25,000 35,000 Temporary labor 20,000 24,000 Setups 70,000 100,000 Materials 150,000 150,000 Depreciation 60,000 100,000 Marketing 70,000 75,000 Customer service 10,000 20,000 Administrative 50,000 70,000 In addition,Windom spent $25,000 on 50 engineering changes with a cost driver rate of $500 and $30,000 on eight outside contracts with a cost driver rate of $3,750.Required: a.Prepare a traditional income statement.b.Prepare an activity-based income statement.

Which of the following statements regarding the trade-off between conformance and nonconformance costs is(are)false? (A)The optimal level for a company's quality control program occurs when its conformance costs equal its nonconformance costs.(B)There is an inverse relationship between the costs spent on nonconformance costs and the level of quality achieved.

Finesse is a specialty molder of plastic jar covers for the cosmetics industry.Because the products sold are expensive cosmetics,the large cosmetic companies who purchase the jar covers are highly sensitive to the appearance of the product.Any cuts,nicks,abrasions,or pieces of dirt embedded will result in rejection of the units.The company spends a significant amount of time in the quality control area.The following list of sub-activities has been developed for quality control: Number Activity Description 3.1 Move units from production area to inspection area 3.2 Quality Control inspector reviews lots 3.3 Quality Control inspector determines lots to be inspected 3.4 Each unit is physically inspected 3.5 Defective units are returned to production area for rework 3.6 Good units are sent to shipping for packaging and shipment to final customer 3.7 Record of units inspected is recorded in production office In an activity listing with value-added scores:

Marine Enterprises has developed the following unit costs for the production of one of its products,based on a normal activity of 10,000 units per month: Direct materials 2.0 pounds @\ 12=\ 24.00 Direct labor 1.5 hours @\ 15=\ 22.50 Variable overhead 120\% of direct labor cost Fixed owerhead 140\% of direct labor cost What is the total amount of overhead included in the overhead budget for a month in which production is expected to be 11,000 units?